Cash Flow & Budgeting

What is it? And Why Do We Do It?

Posted on: 08/26/2016

What it is:

Cash flow refers to how you manage your money. Each month you have money that comes in (income) and money that goes out (expenses). The goal is to have your expenses be less than your income. Budgeting is a tool/discipline you can use to help manage your cash flows.

Why it’s Important:

Money impacts nearly everything you do—your quality of life, opportunities, and comfort level. Planning appropriately before and during retirement can help optimize your financial situation. The basic idea here is you need to withdraw enough money to cover your living expenses, but you have to accumulate and save beforehand to have enough.

Things to Consider:

Keep a budget—Create a monthly budget and stick to it. This doesn’t mean restricting yourself, but it does mean holding yourself accountable. Tracking every penny will help you save, plan appropriately, and spend within your means.

Pay off debt—Not all debt is bad, but most of it is unnecessary. A good rule of thumb is don’t buy it if you don’t have cash for it now. Debt often comes from our natural inclination for immediate satisfaction. Sadly, readily available lines of credit, high interest rates, fees, and monthly payments eventually catch up and all that money that could have been used for savings, rainy day funds, or investing, is now gone. So pay it off sooner than later. Negotiating lower interest rates on your credit cards, transferring balances to cards that offer no interest for a period of time, and taking the time to understand the terms associated with your lines of credit can all help in reducing your debt and pay it off faster.

Set up auto payments—Technology offers many benefits from online banking to paying monthly bills. It’s easy to forget payments with so much going on so save yourself some time and hassle and streamline expenses by setting up auto payments for regular bills.

Understand the differences between pre-tax and after-tax contributions—Do you want your tax dollars to work for you today or later down road? Pre-tax contributions allow more of your money to work for you today (i.e. Traditional IRA or 401k Plan). These contributions help reduce your taxable income today, but you have to pay taxes on these contributions and whatever growth they incur when you withdraw it at a later time. After-tax contributions (i.e. ROTH) reduce your tax obligation in the future by having you pay taxes on the contributions now. When you take money out later you don’t have to pay taxes on any of the contribution amount or capital appreciation it may have.